Risk – Section Index
What This Section Covers
These files cover the main risk types specific to alternative investments. Most differ materially from public market risks: they arise from illiquidity, model-based valuation, leverage embedded in the asset, and operational complexity. Read this section after Concepts and Fund Structures.
Files in This Section
| File | Risk Type |
|---|---|
| Liquidity Risk | Inability to sell or exit at a fair price |
| Valuation Risk | Uncertainty in the stated value of private assets |
| Leverage Risk | Amplified losses from the use of borrowed capital |
| Concentration Risk | Over-exposure to single positions, sectors, or geographies |
| Operational Risk | Risk from failed processes, systems, or human error |
| Regulatory Risk | Impact of changing regulation on fund value or operations |
| Currency Risk | FX rate movements reducing home-currency returns |
Suggested Reading Order
- Valuation Risk — most distinctive to alternatives; Level 1/2/3 hierarchy is foundational
- Liquidity Risk — why illiquidity is the central risk management challenge
- Leverage Risk — how LBO and fund-level debt amplify losses
- Concentration Risk — multi-dimensional; often underestimated in “diversified” portfolios
- Operational Risk — process and counterparty risks specific to fund administration
- Currency Risk — FX dynamics for cross-border portfolios
- Regulatory Risk — fund-level and portfolio-company regulatory exposure
Most Important Links
- Valuation Risk — contains the Level 1/2/3 framework and key conflicts of interest
- Liquidity Risk — most operationally relevant risk for LP portfolio management
- Concentration Risk — introduces multi-dimensional concentration framework
- Leverage Risk — contains verified LBO equity loss arithmetic
Self-Check Questions
- Why is most of a PE fund’s portfolio classified as Level 3?
- What incentives might encourage a GP to delay recognising a markdown?
- What happens to LP liquidity if multiple GPs issue capital calls simultaneously during a downturn?
- Give three dimensions of concentration risk that a fund-of-funds investor should monitor.
- What is the difference between asset-level leverage and fund-level leverage?
Related Sections
- Concepts — NAV and J-curve are closely linked to valuation and liquidity risk
- Fund Structures — open-ended vs closed-ended structures create different liquidity risk profiles
- Metrics — Volatility, Sharpe Ratio, and RVPI all interact with risk
- Sources — IPEV, IFRS 13, and SBAI are key sources for this section